Uncertainty over the outcome of the US presidential election and market upheaval in the eurozone late last year prompted some buyout firms to seek more deals in the UK towards the end of 2012.

David Higgins, partner at law firm Freshfields Bruckhaus Deringer

UK buyout volume rose to $11bn in the fourth quarter across 41 deals of last year up from $3.6bn in the preceding three months across 37 deals, according to data provider Dealogic. This marked the UK’s best quarterly performance since the second quarter of 2008.

Last year’s figures were bolstered by Terra Firma’s $5bn buyout of Annington Homes, the largest in that quarter and one of the largest European deals to be completed in 2012. Terra Firma used only $801m in equity for the residential property owner, acquired from Japanese bank Nomura, the bank from which the buyout firm spun out in 2002.

Buyouts accounted for 31.5% of all UK mergers and acquisitions activity in the last quarter, up from 11.9% in quarter three and the highest proportion since the first quarter of 2007.

Charlie Johnstone, a partner at UK buyout firm ECI Partners, said the UK market was increasing in confidence. He said: “There are some amazingly resilient sectors, for example retail is still a very large proportion of our economy which bifurcates between distressed and growth assets.”

Graeme Gunn, partner at investor SL Capital Partners, said that last year felt like a “year of two halves”. He added: “From our perspective, quarters one and two were reasonably buoyant with quite a few good exits. However, these died over the summer because of a combination of macro factors which were not that great. So, in quarter three, it felt like everyone was taking a pause to see what happened in the US elections and with the uncertainty here in Europe.”

He said that the “pent-up deals that were bubbling around in the summer meant there was a bounce in the deals done in quarter four”, although he warned that the market still “feels a bit quieter than where we would expect to be”.

Gunn added that the UK had once again become the biggest market in Europe for private equity, “with good-quality mid-market funds the mainstay, with the sub-£100m equity market remaining quite active”.
He said: “There is also a fair flow of secondary deals which I think is about risk aversion, and the banks being happy to roll over to new equity ownership, which can develop a new strategy for the business. The UK has definitely kept up a pace and it is better than many other European markets.”

David Higgins, partner at law firm Freshfields Bruckhaus Deringer, agreed. He said: “There are a lot of investment professionals based in the UK and it is sometimes easier to fund deals if the bank is based in London and the deal is being done just down the road.

“But, also, the UK is relatively stable compared with Europe at the moment, so those looking to invest are likely to choose the UK.”

Sachin Date, Europe, Middle East, India and Africa private equity leader at Ernst & Young, said that the UK had “held up pretty well” compared with continental Europe. He said: “One reason for this activity is that investors are confident at least that the UK currency is not going to disappear… the UK is one of the few countries in Europe where more deals were done in 2011 and 2012 than the previous year.”

However, he warned that the transaction market could be better, and that a further confidence boost was needed in the market this year. He said: “People need to realise that the situation with the sovereign debt crisis in the eurozone means that the market will look like this for the foreseeable future… I am hoping there will be a realisation among vendors and buyers that this is the new normal, this might take a few more months to kick in but, at some point, the dam has to burst.”

Edmund Reed, a partner at law firm Travers Smith, said: “I think there is slightly more predictability in the UK market compared with Europe at the moment as the eurozone staggers from crisis to crisis. There is a sense that the UK economy is not going to suffer from any major shocks, and so there is a slightly easier M&A market in the UK.”